Breaking the Buck: Understanding Money Market Fund NAV Drops Below $1

By Markets & Investing DeskUpdated Nov 10, 2026

Definition

Breaking the buck happens when a money market fund built to hold a stable $1 share price sees its net asset value per share fall below $1, so investors lose part of their principal.

Key takeaways

A fund that rounds to the cent breaks the buck once its shadow NAV drops below $0.995 per share.
Under SEC Rule 2a-7, stable NAV funds can value holdings at amortized cost and pay returns as dividends.
The Reserve Primary Fund fell to $0.97 in 2008 after Lehman Brothers paper it held collapsed in value.
Since 2014, institutional prime and municipal funds have used a floating NAV priced to four decimal places.

Breaking the buck happens when a money market fund that is designed to hold its share price at a stable $1 can no longer do so, and its net asset value (NAV) per share falls below $1. For investors, it means a product they treated as cash has lost part of the principal. In a fund that rounds its price to the nearest cent, that happens once the underlying value of the portfolio drops below $0.995 per share, because the published price then rounds down to $0.99.

How a Stable $1 NAV Works

A money market fund is an open-end mutual fund that buys short-term debt such as U.S. Treasury bills, repurchase agreements and commercial paper. Like any fund, its net asset value is calculated as:

NAV per share = (total assets − total liabilities) ÷ shares outstanding

What makes a stable NAV fund different is how the assets are valued and how the result is rounded. Under SEC Rule 2a-7, qualifying funds may carry securities at amortized cost: a bill bought at a discount is assumed to accrete steadily toward its face value at maturity, rather than being marked to its day-to-day market price. Combined with rounding to the nearest cent, this lets the fund keep a $1.00 share price while income is paid out as dividends.

That is why a stable NAV fund never shows a price gain. A fund holding $2 million in assets against 2 million shares prices each share at $1, and the return arrives as monthly dividends, often reinvested as additional $1 shares. Your balance grows through share count, not share price.

The fund still has to track what its holdings would fetch in the market. That market-based figure is often called the shadow NAV. As long as it stays between $0.995 and $1.005, the rounded price remains $1.00. If it slips below $0.995, the fund can no longer round up to a dollar, and it has broken the buck.

Worked Example (Hypothetical)

Assume a fund has 500 million shares outstanding and holds short-term debt carried at $500 million at amortized cost.

Normal conditions. Market value of holdings: $499.6 million. Shadow NAV = $499.6M ÷ 500M = $0.9992. Rounded to the cent: $1.00. Nothing visible changes for investors.
A credit event. One issuer, making up 1% of the portfolio ($5 million), defaults and its paper is marked to 20 cents on the dollar, a $4 million loss. Market value falls to about $495.6 million. Shadow NAV = $495.6M ÷ 500M = $0.9912. Rounded: $0.99. The fund has broken the buck.
Redemptions make it worse. If investors pull money and the fund sells its best, most liquid holdings to pay them, the remaining shareholders are left with a larger share of the impaired asset, which can push the NAV lower still.

The example assumes no fee waivers or sponsor support. In practice, a fund sponsor can choose to buy a troubled security at par or inject capital to protect the $1 price, but it is not obliged to.

Why Breaking the Buck Happens

Credit losses. A holding defaults or is downgraded sharply, and its market value falls far below its amortized cost.
Riskier strategies. Derivatives or leverage can create capital losses that short-term debt alone would not.
Income below expenses. When interest rates are near zero, the fund’s gross income may not cover its expense ratio. Funds in that position have often waived fees to avoid a negative return.
Runs. Heavy redemptions force sales at depressed prices and concentrate losses on those who stay.

History of Money Market Funds Breaking the Buck

1994: Community Bankers U.S. Government Money Market Fund. Despite its government-securities name, the fund had suffered large losses on derivatives. It was liquidated and paid investors 96 cents per share. It was a small institutional fund, and the episode drew limited public attention.

2008: Reserve Primary Fund. The fund held commercial paper issued by Lehman Brothers. When Lehman filed for bankruptcy in September 2008, the value of that paper collapsed and the fund’s NAV fell to $0.97. Redemption requests surged, and the run spread to other prime money market funds. The U.S. Treasury responded with a temporary guarantee program for money market fund shares to stop the outflows.

These two are the cases most often cited. Many other near misses were avoided because sponsors absorbed losses, so the short list understates how often stable prices came under pressure.

Regulation After 2008

Rule 2a-7, which governs money market funds, was tightened in stages after the crisis:

2010 amendments capped a fund’s dollar-weighted average portfolio maturity at 60 days, raised credit quality standards and added minimum daily and weekly liquidity requirements.
2014 amendments required institutional prime and institutional municipal funds to use a floating NAV priced to four decimal places, and allowed liquidity fees and redemption gates.
2023 amendments removed redemption gates, raised liquidity minimums and introduced mandatory liquidity fees for institutional prime and institutional tax-exempt funds when daily net redemptions are large.

Government money market funds (such as Treasury funds) and retail funds may still seek a stable $1 NAV and pay their yield as dividends.

Floating NAV movement. An institutional prime fund priced at $0.9998 one day and $1.0002 the next is not breaking the buck in the traditional sense; its price is designed to move.
Low or zero yield. A fund earning almost nothing has not broken the buck as long as the share price holds at $1.
Money market deposit accounts. These are bank deposits with FDIC coverage up to the legal limits. Money market funds are securities and carry no FDIC insurance.
Broker failure. SIPC protection addresses missing assets when a brokerage fails, not a decline in a fund’s value.

Limitations of the Concept

Breaking the buck is a threshold, not a measure of how much was lost. A fund at $0.99 and one liquidating at $0.96 have both broken the buck, yet the losses differ by a factor of four. The rounded price also hides stress until the threshold is crossed: a shadow NAV of $0.9951 and one of $1.0000 both publish as $1.00.

FAQs

Does breaking the buck mean investors lose most of their money?

No. Losses in the known cases have been a few cents per share. The larger harm is often delayed access to cash when a troubled fund suspends redemptions or liquidates over time.

Can a government money market fund break the buck?

Yes, in principle. Government funds hold Treasuries, agency debt and repurchase agreements backed by them, which lowers credit risk, but a stable $1 price remains an objective rather than a guarantee. The 1994 fund that broke the buck carried "government" in its name.

The Bottom Line

Investors who treat money market funds as cash should know these funds are securities with no FDIC insurance, and their stable $1 price depends on valuation, rounding and sometimes sponsor support. Government and retail funds may still keep a $1 price, while institutional prime funds float. Because the rounded price can hide stress until the threshold is crossed, a $1.00 quote alone does not show how close a fund is to a loss.